The escalating debt crisis on the eurozone periphery is starting to contaminate the creditworthiness of Germany and the core states of monetary union.

Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia.

"Germany cannot keep paying for bail-outs without going bankrupt itself," said Professor Wilhelm Hankel, of Frankfurt University. "This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings."

The refrain was picked up this week by German finance minister Wolfgang Schäuble. "We're not swimming in money, we're drowning in debts," he told the Bundestag.

While Germany's public and private debt is not extreme, it is very high for a country on the cusp of an acute ageing crisis. Adjusted for demographics, Germany is already one of the most indebted nations in the world.

As the following Reuters chart shows (based on information provided by BIS), France and Germany are the largest holder of Greek debt:

As The Street notes, France and Germany are also greatly exposed to Portugal and Spain:

France's banking sector has the second-largest exposure to Portugal and Spain debt loads, after Germany, according to the BIS.

European banks have more at-risk assets in Portugal and Spain than in Greece. European lenders are holding Portugal debt issues of $240.5 billion -- including $47.4 billion by German banks and $44.9 billion by French firms, according to BIS figures from the end of 2009 quoted in a Bloomberg report.

And as Tyler Durden points out, France Germany and the UK are getting hit with wider credit default swap spreads:

With a stunning $630 million, $558 million and $370 million in net notional derisking, France, UK and Germany are the top three most active recipients in negative bets in the prior week, not just in sovereigns but in all names...

Zero Hedge's outside bet to be the first core country to blow up, thanks to its massive PIIGS exposure, France, finally made the top spot in net derisking, with $629 million in net notional, or 189 contracts. The smart money is now massively betting that Europe's core is done for; as the PIIGS have demonstrated, the blow out in spreads for the core trifecta can not be far behind.

Given that central bankers have - for several years - focused on credit default swaps as the most important economic indicator (see this and this), widening spreads are a bad sign, indeed.

U.S. banks hold about $133 billion in debt from Ireland, Spain, Portugal and Greece ....

***

A full-blown debt crisis in Europe could ... also send the euro plunging against the dollar, making the greenback stronger on world markets and undermining the efforts of the Obama administration to boost U.S. exports overseas.

"For now, the U.S. is kind of insulated," said Simon White, a partner at the London-based research firm Variant Perception. But whether it stays that way, he said, "depends on how deep the crisis goes."

Americans will not be spared if there's a recession in Europe, even if U.S. bank exposure to European government debt is relatively limited.

The European Union is the second largest market for U.S. exports, behind only Canada. The EU bought about $175 billion in U.S. goods in the first three quarters of this year. That's up about 8% from a year ago.

So worsening problems in Europe will clearly be a drag on the U.S. as well.

But the question of what country the "contagion" might spread to next is really the wrong question altogether.

The real question is whether the wealth of the people around the world will continue to be shoveled into the bottomless pit of debts held by the big banks, or whether the people will prevail and the giant banks and bondholders will be forced to take a haircut. See this, this and this.

2 comments:

For what I read in the BIS quarterly report, the country most exposed by far to Portuguese debt is Spain. Greek and Portuguese liabilities are relatively small, while the Irish one is enormous compared to its size, almost as big as the Spanish one - Britain and Germany being the most exposed ones.

As for Spain, the debt is some 25% larger than the Irish one (only) but has greater implications for the real economy because its companies and market are much larger (actually Spain would merit to be in the G7, as it ranks above Canada and even Russia, but for historical reasons it is not a member). France, Germany, the USA, Britain and the other EU countries group (that includes the Netherlands, Belgium, etc.) are quite similarly exposed to the Spanish debt (almost 1/5 each).

But why has debt skyrocketed. At least partly, and this seems very clear and extreme in the Irish case, because states have attempted to save banks from their own mad gluttony, trying to prevent a private financial sector domino effect... to no avail. Today the private debt has been nationalized (instead of nationalizing bank management after due bankruptcy), what is absurd and has no run.

Core countries like Germany or France have tried to prevent this peripheral, mostly private, financial problems from spreading to them, by forcing peripheral states to bailout and cut budgets, making the peoples the ultimate payers of a debt they never contracted.

However, now it seems all this is failing anyhow, and core Europe will also suffer the strike. Germany, France and the Benelux are between a rock and a hard place and it's also their fault anyhow (their leaders', their banks') - so it's not that unfair. They cannot bailout anymore but they cannot either afford to suffer the unavoidable bankruptcies that will come.

So the best is to make a jubilee and start all over, maybe even trying some other formula than brute force capitalism. The invisible hand either has never existed or is like the Black Death (violent spurts of radical destruction), so we better consider that liberal economics is wrong and start reorganizing on other basis before we destroy all the productive fabric, that is still there to serve our needs.

The need for Greece and other European economies to slash government spending is not some artificial imposition by the IMF or the European Union. Once investors decide that a country living beyond its means will have a hard time meeting its debt obligations, spending cuts become a reality of arithmetic.

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